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Out-of-court workouts may provide contractual resolutions

On Behalf of | Oct 25, 2021 | Business Law |

Commercial debtors and unsecured creditors may find resolutions to their contractual disputes without stepping into a courtroom. Under chapter 11 of the U.S. Bankruptcy Code, struggling businesses have a legal right to restructure their liabilities.

As noted by the Administrative Office of the U.S. Courts, a debtor’s petition must contain a plan for a business’s reorganization. The plan, however, must obtain the approval of a committee of the debtor’s largest unsecured creditors.

Debtors and creditors may revise their arrangements

Debtors may prefer to avoid bankruptcy. They may instead decide to review their options to uphold contracts with their creditors. If a business, for example, does not have many unsecured creditors, its owners may offer to work out a solution such as renegotiating an existing agreement.

As reported by CFO.com, creating a private out-of-court composition allows parties to restructure an existing commercial contract. Unsecured liabilities such as a lease agreement may provide a business with relief through a revised arrangement. Even when temporary, it may allow a business to get back on track financially without a breach.

Negotiations may result in a workable composition

By avoiding the Florida court’s legal procedures, workout negotiations may allow parties to resolve financial issues quickly and with less paperwork. Debtors may need to first prepare financial statements and request confidentiality from creditors. Compositions, however, may require consent from a debtor’s other creditors.

Reviewing options regarding creditors’ contracts may provide a way to avoid bankruptcy. Detailed discussions with each party’s legal team may result in an arrangement that works for all parties involved. Under certain circumstances, a debtor may reach one-off agreements until achieving the desired outcome with all creditors.